Oliver Herzfeld is the Chief Legal Officer at Beanstalk, an Omnicom-owned global brand licensing agency and consultancy that has represented hundreds of the world's most reputable brands, celebrities and entertainment properties since its inception in 1992. In his role, Oliver leverages over 20 years experience practicing trademark, copyright and intellectual property law to help clients such as AT&T, Procter & Gamble, Stanley Black & Decker and HGTV extend their brands into new product categories through strategic brand licensing partnerships.
Nothing herein should be considered legal advice or the creation of an attorney-client relationship.

When A Breach Is A Benefit

Most people know that when one party breaches a contract the other party may sue for its provable damages. But what if the non-breaching party does not suffer any losses? If a breach actually provides a benefit to the other party, would the benefit preclude the recovery of monetary damages? The recent Delaware court decision in the case of Fletcher v. Ion Geophysical provides some useful guidance on this important question.

Background

In the fall of 2009, Ion entered into a multi-part transaction valued at between $195 million and $245 million to provide it with desperately needed liquidity, enable it to continue operating and avoid bankruptcy. Fletcher had a contractual right to consent to a relatively small portion of the larger transaction, namely, the issuance of securities by an Ion subsidiary in consideration of a $40 million bridge loan, but Ion failed to solicit or obtain Fletcher’s consent. The overall transaction was expected to benefit Fletcher immensely and Fletcher faced financial disaster itself if Ion went into bankruptcy. Nonetheless, Fletcher sued Ion for failing to seek and secure its consent.

Competing Hypothetical Negotiations

An earlier opinion in the litigation held that Fletcher could pursue a claim for monetary damages and the precise amount would be resolved by “determining the amount Fletcher would have received in a hypothetical negotiation regarding its asserted right to consent.” In response, the parties constructed the following two competing versions of the hypothetical negotiation. Fletcher’s version portrayed Fletcher as a tough negotiator that would have refused to grant its consent unless Ion agreed to pay almost two dollars to Fletcher for every dollar of bridge financing (i.e., $78 million in exchange for its consent to a bridge financing that totaled only $40 million)! In Fletcher’s scenario, Ion is perceived to be a weak and hapless negotiator that was desperate and would have done anything to close the deal, including acceding to all of Fletcher’s demands in full. In Ion’s version of events, it would have found an alternative way to structure the bridge transaction that would not require Fletcher’s consent, thereby not obligating Ion to pay Fletcher anything.

Hypothetical Negotiation (Source: Pixabay.com)

The Decision

The court characterized both parties’ positions as “cartoonish” and “simplified caricatures of how they believe the negotiators would have behaved.” It pointed out that in a recent unrelated case, another consent holder overplayed its hand regarding a breach of its consent rights and, as a result, was determined to be “entitled only to nominal damages of $1.00 because the actions taken in violation of the plaintiff’s consent right did not harm, and actually benefited the plaintiff.” Nonetheless, the court took a middle-of-the-road approach here and held Ion liable to pay Fletcher $300,000, representing three times what certain other existing lenders of Ion received in consideration for their consent to permit the bridge financing to proceed.

The Lesson For Contracting Parties

This case is a wake-up call for contracting parties to avoid willfully breaching contract provisions in situations in which the other party benefits from the breach or, at a minimum, does not suffer any damages. In particular, monetary damages for contract breaches are determined by the reasonable expectations of the parties before the breach occurred and such expectations may include a payment from the breaching party in consideration of the other party’s consent to any modification to, or alteration of, the original contract terms. Even if it is ultimately determined that no monetary damages (or nominal monetary damages) are appropriate, the breaching party would still be exposed to the possibility of injunctive relief and other non-monetary remedies. Consequently, a party considering a potential breach would be well-advised to first seek the advice of competent legal counsel. Doing so would help avoid having to expend time, money and resources engaging in a formal legal dispute, as well as the possibility of liability for damages and other remedies as part of an adverse ruling.

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